Lower MDR will kill the digital payments industry: Banks

BENGALURU: Digital payment gateways and makers of card readers are resisting a government panel’s recommendations to slash the fees merchants have to pay banks on credit and debit card transactions.

A week ahead of the Union Budget, a committee of chief ministers led by Andhra Pradesh’s Chandrababu Naidu has suggested abolishing the merchant discount rate (MDR) for digital payments made to government entities.

In its report submitted to Prime Minister Narendra Modi on Tuesday, the committee also pressed for RBI to operationalise its recommendations made in December to “substantially lower” the rate.

These were a part of other recommendations the panel made towards encouraging digital transactions and disincentivising cash payments.

Its suggestions on MDR, however, disagree with that of the recently released Ratan Watal committee report that warns about potential pitfalls in imposing regulatory limits or keeping the fee too low. MDR is what merchants have to pay to banks issuing the card readers, or point-of-sale (PoS) devices. The money is then split with the entity issuing the cards.

“There should be no interference on pricing and MDR should be market-driven,” said Naveen Surya, MD of payment company ItzCash and chairman of Payments Council of India, an entity representing nonbanking payment companies.

“The only regulation should be on how MDR is divided between the (card) issuer and acquirer (banks that provide card readers to merchants).”

Surya added: “We have not understood the need for the panel to recommend zero MDR for digital transactions to government entities since the government is already saving on the cost of cash due to digital payments.

It is contradictory to the idea of promoting digital payments.” The chief minister’s panel in December recommended MDR of 0.50% with a floor and cap for debit card payments, which is lower than the pre-demonetisation rate of 0.75% for transactions of up to Rs 2,000 and 1% for that over Rs 2,000.

Banks had waived off MDR till December 31 on the government’s instructions. MDR pricing became a raging issue following a recent threat by fuel stations to stop accepting card transactions, offering a glimpse of the severity of the discontent.

While banks are likely to bear the maximum brunt of lowered rates, the impact will also ripple over to the rest of the ecosystem, say payment companies. “With low MDR, banks will not have incentive to acquire merchants and deploy PoS machines.

While we will not be directly impacted by low MDR since we do not feature in the settlement process, we will be affecproted if banks do not want PoS machines,” said Lokvir Kapoor, chief executive of Pine Labs, a maker of card readers. “The entire industry will slow down.”

All entities involved in card payments should get “fair returns”, said Paresh Sukthankar, deputy MD at HDFC Bank, the country’s largest issuer of PoS devices to merchants.

“If providers of PoS infrastructure don’t make a reasonable return, that in some ways would inhibit growth of the acceptance infrastructure, and that doesn’t help the entire effort of (encouraging cashless transactions),” he said.

For payment gateways such as PayU and RazorPay, MDR forms a significant part of their revenues. “It is most of our revenue,” said an executive at RazorPay. “If MDR becomes insignificant, then we will have to charge other fees to merchants.”

The Committee on Digital Payments headed by former finance secretary Ratan P Watal has suggested withdrawal of all charges levied by government departments and utilities on digital payments and for the state to bear the cost of such transactions.

But on MDR, the panel highlighted that the fee is essential for the sustained growth of the digital payments industry as it incentivises banks to issue cards and promote their usage.

The committee headed by Watal, who is principal adviser for social sector in the government thinktank NITI Aayog, said regulatory caps on MDR would hamper the growth of the payments industry, and called for minimal intervention with regard to its pricing.